Today I wrote an article “How To Raise Finance For A Property Development” for Roberta Ward for her website – My Property Mentor. It was well received and so I thought I would share it here as well!
How To Raise Finance For A Property Development
So you’ve found your dream development project…now all you need is the money to buy it! In today’s market it’s not easy to raise finance – but if the profit margins are there, people will listen and lend.
The first rule is that property development is a business. Businesses exist to make money and that must be your focus. You must continually question yourself and your plans to ensure you are going to make your projected profit margins. Forget the TV shows and stories about how glamorous property development is – forget the future lifestyle you are dreaming about. Fundamentally you are in property development to make money. Stop dreaming and start doing.
Now we’re clear that property development is a business that is going to make you money, the next step is to draw up your business plan. Your business plan is your key to raising finance for your property development. The business plan should be in place for each and every property you are thinking about developing. You should write down all your findings – no matter how well you think you know it – writing your plan down clarifies your thinking, gives you focus and highlights any potential pitfalls. It is easy to get carried away by the excitement of a project and a business plan keeps you grounded and on track.
The business plan should detail the area, the reasons why you’re buying, the current supply of properties on the market and the demand for properties in that area. You will need to talk to local agents about the market, research house prices, check land registry figures and be aware of what is happening in the wider market (e.g. employers, schools and transport in the area). Note down anything that may impact upon your property sale. Think about your target market (who you’re going to sell to) and if anything is happening which may influence them to buy or not buy your property. It doesn’t have to be reams of page long but it should show a proven market for your product.
Once you’ve got all your research together for your area and the property, you need to get down to the nitty gritty of the numbers. The number 1 rule is not to massage the figures to suit you. You may have found (on the surface) a great opportunity – but you need to make sure the figures add up and that you are going to make money. There is no point doing a development project where you work for free. This means you have to include all the costs of the development and a profit margin for you. You will need to get quotes together for the work you plan to undertake, the financing costs of the development (remember you will still have to pay interest on the loan while you are doing the works), buying and selling costs, and legal costs.
You also need to factor in what you are going to live on while you are doing the development work. Many developers will take their wages at the end of a project when it sells – however it is important to note that the costs are front-loaded. What this means is that you will need to have money ready to support you and live on while you are doing the project. Your living costs and bills will still need to be paid during a project and this has to be accounted for if you are working full-time on a development project. This is often over-looked and can be the downfall of many projects.
Now that you’ve got your business plan together of the market, the costs of the project and how you’re going to survive during the development you should be clear about the profit involved. Remember to cost for your time – unless you want to work for free! Make sure that a development is going to be worth the time, risk and money involved. It is important that you try and quantify what the different risk factors are and price for them accordingly. If a project is going to take a long period of time make sure you calculate why it is worth taking on such a project. Everything boils down to risks and rewards. The key is in ensuring you have the right balance of risk to reward in a development project.
Once you have your business plan in place you can start approaching people to discuss raising finance for the project. You need to make sure your business plan is easy to read and understand – and importantly highlights the figures of the project. There are several places you can go:
1. Mortgage broker. A mortgage broker has access to deals which “Joe Public” may not be able to access. There are some specialist development mortgages out there (e.g. TMW) which allows you to borrow and develop the project. Specialist development banks have also entered the market (e.g. Aldemore) which allow you to raise finance to develop a project.
2. High street bank. Some banks such as LloydsTSB and RBS are lending on development projects. Arrange an appointment with a local bank manager, take your business plan with you and show them what you are looking for. Commercial lending does exist for development projects.
3. Friends and family. You may be surprised how much money some of your friends and family have stashed away in the bank and who are willing to lend on a project. The key is in ensuring you show the business plan and treat any funds they lend as a business arrangement. You can offer a good rate of return for any money lent, or maybe even a profit share.
4. Joint venture. There are a good number of people who are looking to collaborate and combine financial resources and knowledge. Most times, this will involve some sort of profit share. Get to know people in property by getting involved in property forum sites and networking events where you may get talking to someone who also wants to share the financial risks and rewards of a project.
Finally, always remember that property development is a business. Raising funds is part and parcel of any successful business. Your business plan is your manual on how you will make money. Get this right and you will soon be on your way to building a successful property development business.
Roberta’s blog can be found :Here